Hey There Income Hunter,
During a live event I hosted on Wednesday night I said get ready for very bad Q2 earnings …
Well, JP Morgan made me look good yesterday by reporting shockingly bad results for them.
Banks are getting hit from all sides. Twenty-five percent of assets held on banks balance sheets are bonds that have been decimated this year.
Now, inflation and Fed rate hikes have introduced tremendous counterparty risk to outstanding bank loans.
Two things really stood out in the JPM earnings report …
- Provisions for credit losses shrunk from $1.46 billion in Q1 to $1.1 billion…
- Consumer & commercial banking net income fell 45%
- JPM suspended its stock buyback program
These are just a few red flags, but there are others for the industry, as well …
Today we’ll take a look at other red flags in the industry and ETFs on which to consider putting bearish strategies.
On the Call
If you get a chance listen to the JPM earnings call. Jaimie Dimon did not hold any punches on his opinion of Fed policy.
Now, believe me, I don’t know who I despise more, the Fed or the banks … but it certainly sounds like the Fed is throwing the banks under the bus.
Recently, the Fed ran stress tests on the banks and as a result they forced them to hold an even larger capital buffer, which is dead capital that can’t be used to generate profits.
This comes at the worst time for the banking sector, because, with financial conditions getting tighter by the day their revenues are plummeting.
Bad Assets are Piling Up
QT is a nightmare for banks because the Fed has no choice but to run the program through the banking system …
This forces the banks to hold a larger inventory of bonds than they would under normal conditions.
Check out the doubling in the percentage of us Treasury and mortgage bonds since the 2008 crisis …
This will continue to rise because one of the bank’s responsibilities is to provide liquidity for Treasury bonds, and they are taking on a lot of inventory.
Eventually, we should see the stock trade down to near the Covid lows. (Although it is tricky to sell down here when the Fed could soften it hawkish town to settle down the global bond markets.)
Bring It Home
Once again yesterday the stock market bounced back from an early decline, although banks measured by the SPDR Select Financial sector ETF finished down 2%.
The iShares European bank sector ETF (EUFN) was down over 3% and, to me, the banks are the ones to watch to measure the damage to the global economy.
Prepare for a large amount of defaults, bankruptcies and layoffs coming. I have owned EUFN put spreads for a while and I don’t see any reason to sell them.
The other area that is sliding fast is housing and the best way for traders to play that is by buying put spreads on the iShares real estate trust ETF (IYR).
Have a great day, and as always …
Live and Trade With Passion My Friend,
Griff